10 July 2015
Melbourne Business School conference
‘Creating the Darwinian Company: Adaptive, agile and innovative ’ Conference Objective: To drive innovation culture in Australia, it is essential that company boards are focused on and capable of driving innovation at the company level.
30 MINUTES (3500 words)
Growth through innovation Speech by John Pollaers
INTRODUCTION
What is our corporate culture here in Australia?
I ask this question because attitude is important.
The culture at the top is a bit like the sun and the rain.
It influences the development of new ideas - those wonderful
green shoots of inspiration - and it influences the take-up of
new ideas.
Let me put this in context.
The need for economic renewal in Australia following the
Global Financial Crisis and end of the mining boom has never
been clearer.
Rising youth unemployment, rising house prices and declining
consumer confidence is leaving the majority of workers
frustrated and concerned.
At the same time new technologies are giving us an exciting
glimpse of the possibilities of the future – and the changes that
will impact our lives - and our working lives - in many ways:
Everything from advanced robotics and “3-D printing” to the
“internet of things" - all elements of Advanced Manufacturing.
And yet - to come back to my question about Australia’s
corporate culture – are we ready to take up the challenges and
leverage the opportunities that these new technologies pose?
The truth is that our creative scientists, our forward-thinking
engineers, our designers and design technologists, have
sometimes felt disenfranchised in Australian corporate life.
And this is not all due to artistic and scientific paranoia!
Australia has a wonderful reputation for innovation.
In the 1950s, Australia’s CSIRO developed world leading
technology in solar water heating; Australia developed the
bionic ear, the ‘black box’ flight recorder, WiFi internet and the
technology behind Google Maps.
We have a highly educated workforce, and an urbanised and
digitally connected workforce which means we are well-placed
to take advantage of global opportunities across the advanced
manufacturing spectrum.
There are a great many stories of transformational success in
Australian industry – companies that are not waiting for
someone else to do something; companies that are stepping up
and building new markets, new products or new processes to
compete globally.
But there is also strong evidence that our corporate culture is
inclined to be risk-averse.
Our Boards have tended to focus on compliance and on
efficiency gains – at the expense of new ideas.
This means there is less focus on growth – in particular less
focus on “intelligent growth” – and by this I mean growth
through innovation.
So, in my remarks today I hope to open up the conversation
about what kind of environment and attitude is needed for
innovation to occur in business, and to suggest some strategies
that are working elsewhere – strategies that are fostering a 21st
Century approach to business innovation.
CHARACTERISTICS OF HIGH PERFORMING BOARDS
As I said, the culture starts at the top. So it is useful to look at
the characteristics of successful boards.
A recent report on board performance by Heidrick and
Struggles – the 2014 Asia Pacific Corporate Governance report
– identified the dynamics of board effectiveness and what
drives these dynamics to produce great boards.
The report describes four capabilities of top performing
boards – with nine ‘drivers’ that serve to develop these
capabilities into best practice. I’m going to briefly take you
through these.
The four capabilities of the best boards are:
1. People: Continually reviewing top talent and engaging in
succession planning
2. Vision: Having a clarity of vision and strategy that is both
shared and understood
3. Leadership: Promoting the team dynamics through the
leadership of the board; and
4. Innovation: Maximising the capacity of the board to consider
and adapt to risk and innovation
Each of these capabilities warrants a much longer conversation
than we have time for today. However, the common thread is
creating adaptability, ensuring a board is versatile.
I will be coming back to the final element in more detail but it is
worth reflecting that the key drivers underpinning all four
capabilities, according to Heidrick’s, include establishing clear
criteria for board member replacement and achieving a
balance of skills and experience – as well as ensuring that
regular board evaluations are undertaken.
On this point, Heidrick’s interviewed 145 Australian directors
and found that 81 per cent said their boards were not effective
in exiting unwanted board members.
This is a staggering number.
Think about the impact this must have on board effectiveness.
Clearly we must question why this is happening.
Boards have a duty to ensure that board evaluations are done,
that results are discussed openly, and action is taken to address
any concerns.
A functional and high performing board will result in a higher
performing business.
INNOVATE OR DIE
While all four capabilities are essential and crucially inter-
linked, it is the final element – the capacity to adapt to risk and
innovation – that I would argue must inform all the others.
The capacity and willingness to innovate is mandatory for
boards today.
Companies need to adapt rapidly to changing circumstances as
new technologies and ideas continue to disrupt almost all
industries.
In advanced manufacturing – and this applies across a range of
sectors – perhaps the biggest game-changer is so-called “smart
production”, where the cyber world connects with the physical.
Increasingly, we are seeing a high degree of flexibility in
production - in terms of product needs, in terms of volume, in
terms of timing, resource efficiency and cost.
Technology is enabling companies to fine-tune to customer
needs and make use of the entire supply chain for value
creation.
This is often referred to as the Internet of Things – or Industrie
4.0.
This is the next phase of technology development beyond
electronic and IT systems and further automation, to a fully
integrated and connected world, re-shaping the face of global
supply chains.
Large and small Global industries often report that their
businesses will decay if they do not rise to the challenges posed
by technology disruption. I will come back to the success of
Ericsson and how they continue to transform in a moment.
There are enough stories of failure to make even the most
effective Board a little jumpy. Remember Blackberry. In 2007
more than 1 of every 3 new smartphone purchases in the U.S.
was a BlackBerry. Worldwide the company was second only to
Nokia in the smartphone business, which was just gathering
steam. BlackBerry’s market share would continue to grow but
peaked in 2009 only to spiral downward over the next four
years. What happened? Apple.
Interacting with virtual objects through a touchscreen was
something BlackBerry didn’t offer.
Agile companies – to come back to the theme of today – realize
they will become irrelevant if they do not look for new sources
of growth outside their current core.
So what are the factors that high performing boards share that
enable them to innovate and adapt to these sorts of challenges?
The Heidrick and Struggles study identified three core drivers
of strong performance, consistent across each of the countries
surveyed in Asia Pacific.
These were:
1. A balance of skills, knowledge and experience on the Board.
Getting the right mix of judgment and expertise on a board was
crucial. This is something I will come back to.
2. Empowered committees.
Committees spread the workload and help Boards to make better-
informed decisions.
The lack of committee empowerment was a bigger issue in China,
India and Singapore than in Australia.
3. Identifying board improvement opportunities.
Boards will stagnate if they do not continually identify and
implement improvements.
The study found that performance in this was at the low end across
the region.
This suggests boards can do more to recognise the importance of
board improvements, and to put in place processes and cultures
which promote better performance.
LACK OF EXPERTISE
But in terms of the first driver, a variety of research has shown
that having a balance of skills and experience on a board and
in senior management is fundamental to innovation success.
And yet, we know that the composition of most Australian
boards is relatively homogenous – relative to the make-up of
our society, that is.
The Watermark Search International 2015 Board Diversity
Index, which looked at ASX 200 boards, found that only 3 per
cent of Australian board directors have technology experience.
And only 19.4 per cent have industry experience (which we
might expect to include some engineers and scientists,
however the study is not clear on this point)
53.5 per cent of ASX 200 directors are from a finance and legal
background – made up of 44 per cent from a finance
background and 9.5 per cent are from the law.
Clearly, there is a question that should be considered here –
what might be possible if industry representation was higher?
The mounting evidence shows that companies with diverse
boards and management – that is, diverse in gender, ethnicity,
and, in particular, expertise – are stronger performers and
experience higher growth than their more homogenous
counterparts. (Ernst and Young study in 2013 for example)
Critical to board performance is having relevant industry skills,
targeting capabilities for directions the company is looking to
take, and having internationally experienced members to
ensure the board has a broad lens on fast changing global
markets and new industries that are forming.
BOTTOM UP vs TOP DOWN
High performing Boards – importantly – also have mechanisms
in place which capture ideas and concerns from the bottom up.
In a recent presentation by Andrew Kakabadse, Professor of
Governance and Strategic Leadership at Henley Business
School promoting his new book "The Success Formula" he
highlighted an unhelpful trend on Australian boards post the
GFC where some chairmen are casting themselves in a role
more like the CEO, relegating CEOs into the role of Chief
Operating Officer.
Yet research across the field tells us that high performing
boards bring fresh perspectives to strategies originated by
management – they do not originate the strategy.
Great boards do create an environment where strategy is
openly discussed and input is taken broadly across the
organization.
So, high performing companies are open to original ideas from
more or less everywhere – including, importantly, the shop
floor. And this is important - as I think the following shows.
I want to share with you a characterization of the different
mindsets needed, on the one hand, to grow something, and on
the other hand, to maintain or optimise something.
Forbes magazine recently compared private equity with
venture capital
While the terms are not exactly inter-changeable with
efficiencies on the one hand and intelligent growth on the other,
they reflect similar mindsets – and they have enough in
common to make this a useful way of understanding the
differences.
The two mindsets have fundamentally polar approaches to
value generation.
a. One is bottom-up creation and disruptive innovation
b. The other is top-down optimization.
Private equity and public companies are usually about taking
an existing company with existing products and existing cash
flows, then restructuring that company to optimize its financial
performance.
When private equity works right, it can save poorly-performing
companies from bankruptcy and turn them into profitable
enterprises.
The venture capital process is usually much messier.
As Forbes describes it, often you start with a ragtag guerilla
outfit, with no obvious path forward.
In the documentary “Something Ventured”, venture capitalist
Don Valentine relates how no one wanted to invest in Steve
Jobs and Steve Wozniak in 1977.
Before he would invest in Apple, Valentine had to convince the
two entrepreneurs to accept an experienced executive, Mike
Markkula, as their CEO. Markkula has said that the two men
did not make a good impression on people. “They were
bearded, they didn’t smell good, they dressed funny, [were]
young, naïve.”
I am not suggesting we all have to be entrepreneurs and
outsiders by any means.
Great CEOs, great Boards are focused on a balance of risk.
Using the famous cricket metaphor - companies need to be
hitting consistently, hitting the ones. But occasionally they
really do need to be hitting sixes.
INTELLIGENT GROWTH
It is a balance, where you incorporate some new-to-market
thinking – areas where ideas that have worked in familiar
markets are being applied into new markets, or you are adding
new emphasis – and mixing that up with venturing out there
with some new-to-world thinking, those completely new
ventures.
This is a focus on “intelligent growth”.
Getting back to my point about attitude: What happens in the
minds of our business people clearly affects capital - and the
prevailing mindset in a Boardroom will create, or potentially
limit, commercial value.
Failure, regret and hesitancy are common afflictions in board
rooms.
In 2009, following the Global Financial Crisis, many companies
were particularly reticent.
Then the focus was on cost reductions and efficiency
improvements, with relatively short pay back.
R & D projects focused mainly in these areas.
But the global pressures are such that we cannot afford the
luxury of fear - nor the luxury of sitting in our comfort zones.
Industry boundaries are being re-drawn by lesser known
competitors from emerging markets.
We have to out-innovate the innovators.
Many companies realise this - that they need to examine a
wider range of possibilities for organic growth.
Distilling the findings of one recent study on “intelligent
growth” by the US-based Corporate Executive Board, I was
reminded again how deliberate successful innovation is.
Successful companies approach innovation as a continuous
learning process, involving their senior leaders - across finance,
strategy and R & D - in a collaborative conversation.
In that way, the entire company validates, evaluates and
prioritises opportunities.
Going back to the point about an efficiencies focus versus an
innovation focus – this study found that the big cost-cutting
companies – companies that were focused on efficiencies –
actually achieved 3.5 per cent LESS growth over the previous
decade than those of their peers who were focused on
“intelligent growth”.
The intelligent growth companies were found to share a
number of principles that allowed them to avoid common
growth pitfalls.
STRATEGIES – THE LEARNING LOOP
They established what the researchers described as a “learning
loop” to identify and evaluate opportunities – and, importantly,
they allocated analytic resources to innovation for longer
periods – to better capture information on why projects
succeeded or failed.
In essence, the evaluation and prioritization process was
embedded across the entire organization and involved three
important parts:
1. The first part - described as Strategy Validation - involved
Scenario testing – so, rigorously testing the underlying
assumptions for plausible scenarios
Setting triggers to track criteria for success and failure
And, establishing a process for learning throughout the
investment cycle.
The leading technology company, Ericsson, for example, realized the
need to challenge strategic assumptions and drive organizational
engagement – in order to develop a more robust future strategy.
Ericsson, just to put the company in context, has 35% of the world’s
2G/3G/4G mobile network infrastructure market.
The company’s R & D leaders are empowered to ask pointed
questions of the senior leadership.
Questions include:
Assume you are able to ask a fortune teller three questions
about decisions for 2020? What information would you seek?
And;
What are three things you know for certain and do not need to
ask the fortune teller?
The purpose is to check for strategic biases and dig deep to unearth
entrenched beliefs that might impact effective decision-making.
Biases can creep in at every stage. Separating the beliefs and biases
from likely truths is important – and these biases, both individual
and collective biases of senior leadership, need to be challenged.
2. The second part – described as Opportunity Evaluation –
involves developing a structured process for narrowing
megatrends into specific business opportunities.
The “intelligent growth” companies routinely tested existing
capabilities for their relevance to new markets – and they
identified technology and skills gaps.
In this phase of the so-called “Learning Loop”, companies sought
to be as inclusive of the entire organization as possible.
Larger organisations used an internal inquiry system that allowed
for ongoing feedback – and they asked specific questions of
employees.
Allowing for broad employee inclusiveness was critical to
improving the richness and validity of the ideas.
It also facilitated a culture of openness and sharing.
3. And finally, the third part of this opportunity identification and
evaluation process involves Investment Prioritization.
Successful “intelligent growth” companies created their own
prioritized and weighted sets of decision criteria that were
consistently applied across a portfolio of opportunities.
Companies articulated specific divestment triggers, for example.
Is this business aligned to our long-term strategy? Does this business
have long-term growth potential?
Can we grow this business by leveraging our brand without diluting
its strength? Can this business contribute to growth across all our
platforms? Can we scale this business? Etc.
What this means is successful innovators are actively looking
forward, actively testing scenarios and strategies.
Changing is hard. But electing not to change is still making a
decision – and while it may be the right decision, it should be
an active decision.
This is about not trying to conduct business through the rear
view mirror.
It is reinventing yourself against an onslaught of technological,
cultural, economic, and regulatory shocks that will force you to
enact major business transformations every few years.
WHY SCIENCE MATTERS
So far I have spoken about attitudes and about potential
strategies.
Now I want to reflect a little on where the new ideas come
from.
There is no question in my mind that we need to have a better
understanding, at Board level, of the power of science if we
are to address the challenges of Australia’s economic future.
Advanced Manufacturing is characterized by its deep
involvement with technology research and development (R&D)
and STEM (science, technology, engineering, and mathematics).
It encompasses industries ranging from precision engineering
and aerospace to energy industries such as oil and gas
extraction to medical technology to high-tech services such as
computer software and computer systems design.
Science, technology, advanced engineering and manufacturing
are the connective tissue across all sectors of the Australian
economy - whether you are a banking service, a mining
company or related service, a retailer, a food producer, a
construction company or a health service.
These industries and technologies are the drivers of a high
value future for Australia. It is therefore vital to keep pace with
global advances, to integrate with global supply chains, to
revitalize existing businesses and to create new industries.
To do that, we need experience and expertise of the STEM
disciplines at the most senior levels of our corporate
leadership.
Indeed, more and more of our senior business leaders will need
to come from these disciplines.
We must have a solid appreciation of the possibilities.
And we must build the requisite skills across the entire
community.
Science, the knowledge it provides, and its myriad creative
applications – will help us manage, mitigate and discover
solutions to the problems we know about today, as well as
equipping us to tackle new problems as they emerge.
In the recent monograph, “Science Matters”, published by The
Conversation and the Office of the Chief Scientist, a series of
writers provided some wonderful insights into the possibilities
offered by science.
One of the most dramatic developments in human history – just
to shine a light on one of the science disciplines, PHYSICS – has
been electricity.
In the 21st Century, we find physics entering an even more
vibrant era than the one that stimulated the development of
electricity.
We have ever-increasing computing power. We have new
instruments with unprecedented sensitivity that are amplifying
our ability to understand complex phenonema.
Quantum physics - the ability to manipulate individual atoms,
molecules and photons of lights – is foreshadowing a future
where the communication and processing of information is
radically enhanced even from the incredible advances we have
seen to date.
In CHEMISTRY – another example – we are seeing a revolution
in the material sciences. We now have such as thing as
“electronic plastic” – a semi-conducting polymer that is likely
to replace semiconducting material such as silicon in flat
screen TVs, laptops and smart phones.
It will not be long before we are able to print flexible solar cells
that can be sewn into clothing as cheap portable power sources
for recharging mobile devices.
In the medical sciences, Australia has very proud history of
discovery.
No less than four Nobel Prizes for Physiology and Medicine
have been awarded for work done in Australia.
Cross-fertilisation between medical scientists, physical
scientists and engineers has produced – and continues to
produce – phenomenal innovation in terms of medical devices.
Australian innovators may or may not win the race to build the
bionic eye – early prototypes are currently implanted in three
individuals – but there are plenty of successful collaborations
between the medical and physical scientists in Australia, as
well as corporate success stories, to suggest we stand a very
good chance – Cochlear and ResMed to name just two
Australian examples.
I could go on. The point is: understanding the critical role
science and technology play and the importance of being at the
forefront of their development is vital for the future of
Australia and Australian industry.
IN CONCLUSION
Government is requiring – and industry is demanding – that
industry LEAD the prioritization of allocation decisions and
reforms around technologies and sectors in which Australia
has comparative advantages.
And yet – as we know – there is not the full appreciation in the
highest reaches of our corporate leadership of the value that
science and innovation can bring to companies.
Where once your organization may have needed to reinvent
itself every few decades, today, an onslaught of shocks -
technological, cultural, economic, and regulatory - will force
you to transform every few years.
Where once your CEO might have become a business icon
through a single transformation – the minimum requirement
now is being able to execute multiple transformations.
Success today means fostering a culture of continuous
reinvention—reinvention in your business models, customer
interactions, employee engagement, and the markets you
serve.
We need to fully appreciate the power of the right software and
analytical systems, be able to establish employee familiarity
and ensure organisations have the right talent to leverage
technology opportunities.
Boards oversee the quality of leadership and management.
They safeguard the company’s reputation and values.
But innovation depends on a little more chaos and a little less
control – I think of it as orderly chaos.
We need to focus on “Intelligent Growth” - a new mindset in
many of our boardrooms.
Innovators and Boards are famously uncomfortable in each
other’s company. We need them to be more comfortable in
that discomfort!
The Key Takeaways are:
o Ensure the right talent in place (including at Board level)
o Make science and digital understanding a priority
o Align transformation with company strategy
o Rally organisations around common transformational
goals
o and remember that this is where our leaders of the
future will come from!
END